Hey everyone - question about a construction model I'm having problems with:
Okay, so in this model we're building a small complex of apartment buildings. Each building is being developed, shortly leased up, and sold. In total, there are five buildings, and the construction period, lease up periods and sale times overlap - for instance, the first building will have leased up and sold by the time the last building is built.
Assume for the moment we're going to do this all with one construction loan with interest reserves. The lender is going to lend 70% of hard and soft costs. Equity funds before debt, and any NOI resulting from any of the buildings is going to fund the draws first (i.e. if we have a construction draw on building 5 for $100k, but building 2 returns $20k in NOI, that $20k will be applied to the draw first, the remaining $80k will be a draw that adds on to principal). Same for sales of buildings - if we sell building 1 while the construction is underway, proceeds will first go to the loan balance and then, to the extent that there is any left over, back to GP/LPs.
Here's the problem I'm having: if I total up hard and soft costs, lets say I get $2m. 70% of that is $1.4M and that's what the bank would fund. HOWEVER, because we're constantly paying down and drawing up the loan balance, the max loan balance only ever gets to $1.2m. Which goes to sources and uses?
If I put $1.4M in Sources/Uses, it balances, but we never actually use $1.4M of bank debt. If I put $1.2M, it doesn't balance, but the max loan is correct. If I put that $1.2M, it seems like the offset would be the NOI or sales proceeds used as an additional "source", but if I plug those in... it still doesn't balance.
Am I thinking about this correctly in general, or am I screwed up somewhere?
Thanks in advance.